MARKET WATCH: Energy prices gain in unsettled market

Sam FletcherOGJ Senior Writer

HOUSTON, May 13 -- Energy prices changed direction again May 12, with crude making a small gain in the New York market after recovering from a sell-off earlier in that session after China again increased its bank reserve ratio.

“Yesterday continued the week-long rollercoaster ride, as commodities closed the day modestly higher (oil up 0.7% and natural gas up 0.3%) after the dollar gave back most of its gains on the day,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks were mixed, as the oil service index closed up 0.8 while the SIG Oil Exploration & Production Index (EPX) lost 0.3%.” Oil prices continued climbing in early trading May 13, but natural gas posted early losses on mild weather forecasts.

The gasoline futures price continued its decline on the New York Mercantile Exchange, “but at a much slower pace,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“The term structures of both West Texas Intermediate and North Sea Brent weakened,” he reported. “The term structure of ICE gas oil collapsed since the April contract expired a month ago, which provides some incentives for storage.” Latest data suggest demand for light distillates may have recovered “to some extent” in the aftermath of Japan’s earthquake, said Zhang.

China’s central bank raised its reserve ratio requirement for commercial banks “by another 0.5%, which prompted some intraday sell-off in oil,” Zhang said. “However, the market regained the loss later in the session as we have seen in previous occasions when China announced monetary tightening measures, including a reserve ratio increase or a benchmark interest rate rise.” He concluded China’s monetary policies have a “limited” effect on oil prices.

China is “likely” to further increase interest rates in June, said Jakob Olivier at Petromatrix, Zug, Switzerland.

The May 12 price turnaround after crude fell 6% on May 11 in NYMEX “was supported by a reversal of the euro’s recent descent as the market appeared to view the sell-off in euros as overdone,” Zhang said, adding, “After all, the European Central Bank remains on a much more hawkish stance than the US Federal Reserve Bank.

He said, “Although QE2 [the second phase of the Fed’s quantitative easing program to stimulate the economy] is set to end in June, the Fed will continue on its ultra-loose monetary policies for a prolonged period.”

Zhang said, “We believe that global liquidity will continue to grow through international reserve asset accumulation, which should provide further support to commodity prices. Another significant event in June is that Organization of Petroleum Exporting Countries will meet June 2 when [it] is likely to revise upward its production quotas. However, we doubt that an upward revision to quotas can negate Libya’s production loss, and QE2’s expiration isn’t likely to arrest the strong growth in global liquidity caused by reserve accumulation.”

As a result, he said, “OPEC’s supply restrictions and abundant global liquidity will continue to pose upside risks to oil prices. We expect volatility to be higher this year than last year, due to the diminished efficacy of three factors that usually protect the oil market from supply shocks: oil inventories, OPEC’s spare production capacity, and spare capacity in the global refining system.”

Meanwhile, Jakob said, “The unexpected input last week in the mother-of-all-sell-offs was that open interest in WTI increased, suggesting that fresh money was coming into rather than leaving the market in the big price drop (OGJ Online, May 9, 2011). On May 11, the price of crude oil fell sharply, and open interest increased again. Open interest in NYMEX printed a new all-time-record high May 11 and to have a rising open interest in a market that is declining is not a positive sign.”

He said, “In gasoline, however, the open interest continues to fall, suggesting that gasoline is suffering from liquidation on both sides of the aisle. First short covering fueled the rally on May 9-10, followed by length liquidation.” He added, “There has been a lot of head scratching following the volatility in oil commodities over the last 5 days.”

As a result, Jakob said the US Commodity Futures Trading Commission report scheduled for release May 13 after market hours will attract “much attention” from traders over the weekend. “The CFTC data [are] likely to be a significant sentiment driver for the opening of next week,” Jakob said.

As for other issues, Jakob said, “Yemen, Syria, and Lybia do not command much of a weekend premium [on crude prices] anymore. A floor is trying to be created at $95/bbl for WTI. That level needs to hold to prevent all the passive investments in WTI to show negative year-to-date returns (when including the cost of rolling the positions in a contango structure), but it is also the level where large layers of puts are starting to be positioned for the expiry of the June WTI options May 17. After a volatile week it is important for the bulls to maintain a [WTI] closing above $100/bbl for the headlines in the weekend newspapers.”

Energy pricesThe June contract for benchmark US light, sweet crudes regained 76¢ to $98.97/bbl May 12 on NYMEX. The July contract recouped 71¢ to $99.48/bbl. On the US spot market, WTI at Cushing, Okla., remained in step with the front-month futures contract, up 76¢ to $98.97/bbl.

Heating oil for June delivery increased 1.54¢ to $2.91/gal on NYMEX. However reformulated blend stock for oxygenate blending for the same month continued to fall, down 5.89¢ to $3.06/gal.

The June natural gas contract advanced 1.3¢ to $4.19/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 8.5¢ to $4.10/MMbtu.

In London, the June IPE contract for North Sea Brent crude was up 41¢ to $112.98/bbl. Gas oil for May was unchanged at $932.25/tonne.

The average price for OPEC’s basket of 12 reference crudes fell $4.15 to $107.20/bbl.